East Side Tucson: Multifamily Market on the Rise
Tucson's East Side: A Multifamily Powerhouse
Welcome to Tucson's East Side, the largest multifamily submarket in the metro area, boasting an impressive 24,000 market-rate units. Together with Central Tucson, these two submarkets represent over half of the entire Tucson apartment market, making them the epicenter of leasing and investment activity.
Demand and Vacancy Trends
Let's get into the numbers. Demand has started to stabilize as inflation eases and consumer confidence rises. Over the past year, the East Side saw a net absorption of -130 units—a significant improvement from 2022's dismal -1,500 units. This uptick in renter demand, paired with limited new supply, has driven vacancy rates down from 10.2% in mid-2022 to 9.5% today. Sure, we're still above the all-time low of 4.0% from Spring 2021 and the pre-pandemic level of around 6%, but the trend is promising.
Limited Supply, Stable Performance
The East Side's lack of new construction has played a crucial role in stabilizing property performance more quickly than in other Sun Belt markets. Major metros like Phoenix, Austin, and Denver are grappling with high supply pipelines, keeping vacancies on the rise despite a rebound in demand.
Rent Growth: A Bright Spot
Thanks to the limited threat of new supply, the East Side has managed to retain its rent gains. Even during its toughest year for demand in over a decade, annual rent growth never dipped into negative territory. Over the past year, average asking rents inched up by 0.4%, and expectations are for rents to stay positive through 2024.
Market Snapshot
Vacancy Rate: 9.5% (Submarket) vs. 10.0% (Market)
Market Asking Rent/Unit: $1,019 (Submarket) vs. $1,148 (Market)
Market Sale Price/Unit: $118K (Submarket) vs. $139K (Market)
12 Mo Sales Volume: $60.2M (Submarket) vs. $235M (Market)
Investment Activity
The East Side Submarket has seen a surge in investment activity since the pandemic. Historically low interest rates and strong property performance have enticed investors looking for older assets with significant upside potential. While eight-figure deals were rare before 2019, the period from 2020 to 2022 saw transaction sizes and frequencies soar, pushing total sales volume to nearly $1 billion—comparable to the cumulative total from 2008 to 2019.
However, elevated interest rates have begun to squeeze sales activity. In the past year, approximately $60.2 million worth of multifamily assets changed hands, a sharp decline from the prior three-year average of $253 million annually. Most of this volume came from two significant deals in late 2023.
Notable Transactions
In December, Break of Day Capital acquired Icon on Spanish Trail for $33 million ($128,900/unit). This 1970s vintage garden-style apartment complex, with 256 units, was 90% occupied at the time of sale. The California-based syndication group plans to implement value-add strategies to achieve a pro forma cap rate of 6.2% by year three.
A few months earlier, Equinox on Pima sold for $14.5 million ($135,500/unit) at a 5.7% cap rate. The buyer, AndMark Management Company, focuses on workforce housing in secondary and tertiary markets. This 1960s vintage, 107-unit 3 Star asset last sold in December 2019 for $6.5 million ($60,700/unit).
Outlook
The East Side of Tucson remains a compelling market for multifamily investors, despite the challenges posed by higher interest rates. With limited new supply and stable rent growth, it offers a resilient investment landscape. As economic conditions continue to evolve, savvy investors will find the East Side a lucrative area to watch.
Key Metrics
Availability:
Vacancy Rate: 9.5% (Submarket), 10.0% (Market)
Market Asking Rent/Unit: $1,019 (Submarket), $1,148 (Market)
Sales:
Market Sale Price/Unit: $118K (Submarket), $139K (Market)
12 Mo Sales Volume: $60.2M (Submarket), $235M (Market)
Inventory:
Inventory Units: 24,335 (Submarket), 84,282 (Market)
Existing Buildings: 384 (Submarket), 1,820 (Market)
Demand:
12 Mo Absorption Units: (122) (Submarket), 63 (Market)
Tucson's East Side continues to shine as a dynamic and resilient multifamily market, offering robust investment opportunities amidst a stabilizing economic environment. Investors should keep a close eye on this submarket as it navigates the challenges and opportunities of the coming year.
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